Drilling down into Energy Transfer’s fourth-quarter earnings
|Metric||Q4 2020||Q4 2019||Year-Over-Year Change (Decline)|
|Adjusted EBITDA||$2.592 billion||$2.768 billion||(6.4%)|
|Distributable cash flow (DCF)||$1.362 billion||$1.507 billion||(9.6%)|
|DCF per unit||$0.50||$0.56||(10.7%)|
|Distribution coverage ratio||3.3 times||1.84 times||79.3%|
Earnings dipped during the fourth quarter, pulling down full-year results. Overall, adjusted EBITDA slumped 5.5% in 2020, while DCF declined by 8.1%. That weakness forced the master limited partnership (MLP) to reduce its distribution, freeing up the associated cash flow to finance expansion projects and reduce debt.
While the company’s diversification and relatively stable business model helped cushion the blow during the fourth quarter, several of its business segments were under pressure during the period:
Energy Transfer’s crude-oil transportation and services business was the biggest weak spot. Earnings slumped 23.5% during the period. The primary issue was lower volume on its Texas and Bakken pipeline systems. Also, due to lower oil prices, the company didn’t make as much money on the spread between the price it could buy oil in production basins and sell it into market centers.
Energy Transfer’s natural gas liquids (NGL) and refined products businesses were also under a lot of pressure last year. Earnings from the transportation and service of those commodities fell 5.4% during the fourth quarter. Lower NGL prices impacted its marketing activities, while weak demand hit its gasoline blending operations.
The company also had reduced earnings from its investments in Sunoco LP (NYSE:SUN) and USA Compression Partners (NYSE:USAC). Sunoco’s earnings declined by 5.4% due to lower fuel margins and volumes as a result of the pandemic. Meanwhile, USA Compression’s earnings slumped 10% because of decreased demand for compression services resulting from lower oil and natural gas drilling activity.
On a positive note, the company’s interstate and intrastate gas pipelines performed well during the period, thanks to lower expenses and higher earnings for natural gas storage. And earnings from the company’s catchall “all other” segment jumped thanks to the benefit of last year’s acquisition of SemGroup‘s Canadian assets.
What’s ahead for Energy Transfer
Energy Transfer expects its earnings to improve in 2021. The midstream giant anticipates that adjusted EBITDA will range from $10.6 billion to $11 billion, a nearly 3% increase at the midpoint. The company expects to benefit from higher NGL export activities and pipeline volumes, the impact of higher NGL and natural gas prices, and the contribution from several expansion projects.
It’s also worth noting that this outlook doesn’t include any contribution from Enable Midstream (NYSE:ENBL), which Energy Transfer has agreed to acquire in a $7.2 billion all-equity deal. Enable will add nearly $1 billion of annual adjusted EBITDA to its tally. Furthermore, it will enhance its credit profile and asset footprint while generating at least $100 million in annual cost savings. The company anticipates this deal closing around midyear.
Energy Transfer also expects to invest about $1.45 billion into additional expansion projects this year. That’s a roughly 50% reduction from the $3.05 billion it invested on expansion projects in 2020 and about $100 million less than its initial budget guidance for this year after adjusting for the roughly $250 million of spending it deferred from last year into 2021. Meanwhile, the company sees expansion spending declining to about $500 million to $700 million per year in the 2022 to 2023 time frame.
As a result of that spending decline, Energy Transfer expects to generate a significant amount of free cash flow in 2021 and even more in the 2022 to 2023 time frame. That will increase its financial flexibility, giving it the freedom to repay debt, make additional acquisitions, or return cash to investors via unit repurchases or a higher distribution.
And the company is starting to get serious about the transition to cleaner fuel sources. It launched a new group to focus on finding alternative-energy projects. In addition to purchasing renewable energy to power its operations, the company is evaluating opportunities to transport renewable diesel and renewable natural gas. It’s also evaluating extensive acreage of reclaimed coal mines and timber properties to develop wind and solar projects. And it’s pursuing carbon capture and storage projects.
Better days seem to be ahead
While 2020 was a challenging year for Energy Transfer, it has started off 2021 with a bang by agreeing to acquire Enable Midstream. Combined with improving energy market conditions and a decline in capital spending, the MLP is on track to generate a significant amount of excess cash. These catalysts should accelerate the improvement in its balance sheet, eventually allowing the company to return more cash to investors.
On top of that, it’s starting to embrace the energy transition, which could open up new sources of growth. Because of that, its 8.9%-yielding dividend looks to be on an increasingly sustainable foundation.
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